Where do your taxes go?
In most cases your taxes go to the same place as everyone else’s taxes in the UK: the UK Treasury. Taxes are collected on behalf of the UK Government by HM Revenue & Customs (HMRC).
Council tax and non-domestic rates (aka. business rates) are set and collected by local authorities and the Welsh Government. Local authorities keep whatever council tax they raise, but business rates are redistributed by the Welsh Government as part of the annual funding grant to local councils.
Councils also collect precepts (set by Police & Crime Commissioners & Fire Authorities), which go towards funding policing (non-devolved) and fire & rescue services (devolved).
From April 2018, three smaller taxes – aggregates levy, landfill tax and stamp duty – started to be collected by the Welsh Revenue Authority (WRA). As of April 2019, Wales has also had the power to vary income tax by 10% up or down from 2019 – managed through HMRC.
The Welsh Government also has the power to borrow up to £150million a year. This is capped at a total of £1billion for capital funding (spending on one-off projects) and £500million for revenue/day-to-day spending.
How does that money come back to Wales?
The UK Government (via the UK Treasury) decides how much money the Welsh Government, Senedd etc. should receive each financial year to fund devolved services. To do this they use the Barnett Formula.
The Barnett Formula is supposed to ensure Scotland, Northern Ireland and Wales receive an amount of money based on the size of their populations compared to England. In Wales’ case, we receive about 5.7% of equivalent spending in England because Wales has/had about 5.7% of England’s population.
When the UK Government announce new spending that only benefits England, the other nations are supposed to receive a top up known as a Barnett consequential. Again, this calculated based on their respective populations compared to England.
Barnett consequentials don’t apply when spending is assumed to benefit the entire UK (i.e. defence spending). However, the definition is so broad that the UK Government may decide a major project that solely benefits England counts as a “UK project” (i.e. High Speed 2). In such circumstances, the UK Government may offer Barnett consequentials as compensation to prevent a political row, but it may fall short of the true figure is. Recent examples include spending related to the 2012 London Olympics.
Funding allocated to Wales by the UK Government is delivered in a single lump sum (block grant) which is held in a “bank account” at the Treasury called the Welsh Consolidated Fund. The block grant averages around £16billion a year, with this figure topped up by council tax and business rates to around £18billion a year.
Before the UK left the European Union in 2020, Wales received an additional £245million a year from the EU. This included farming subsidies and funding for projects to improve the economy (formerly known as Objective One). This funding has ended and is set to be replaced by a UK Shared Prosperity Fund.
Fair Funding Explained
One of the most heatly-contested arguments in Welsh politics for the best part of a decade is that Wales is under-funded comparison to the other devolved nations and in terms of our relative need.
Public services are more expensive to provide in sparsely-populated rural areas (which defines most of Wales), while Wales also has high levels of disability, long-term unemployment and a growing elderly population – all of which put pressure on public finances because services for these groups are usually expensive to run.
In 2010, influential economist Prof. Gerald Holtham said Wales was £300million worse of under the Barnett Formula than we would be if relative need was taken into account. After several years of Conservative & Lib Dem austerity measures, in 2016 Prof. Holtham believed this underfunding was no longer there.
The UK & Welsh governments agreed a measure by which funding-per-head in Wales wouldn’t fall below 115% of English funding-per-head until 2020. Given that 2020 has been and gone – and the world has changed forever as a result of the 2020-21 Covid-19 pandemic – it’s unclear what will happen in the future, though the Welsh Government continue to press for needs-based funding formula.
Fair funding is a double-edged sword for nationalists. Screaming “more money” directly undermines the case for independence by sticking your hands in someone else’s pocket.
But at the same time, without extra investment (particularly in infrastructure, people and skills), it makes achieving independence more difficult as it harder to address some of the structural problems holding the Welsh economy back compared to the rest of the UK.
Is Wales “subsidised”? By how much?
For a more detailed look at this see: Wales’ Fiscal Future – Public finances within the UK and with independence
The most recent estimate was from the Wales Fiscal Future report (summarised above) produced by Cardiff University’s Wales Governance Centre in March 2020 (pdf).
The report estimated that in 2018-19, Wales raised £29.5billion in taxes and had £43billion spent on it by the Welsh & UK governments, meaning £13.5billion more was spent on Wales than was raised by Welsh taxes (“the subsidy”).
That’s the picture now. It’s quite probable Wales would spend considerably less in certain policy areas – defence is an obvious one, but there are others like foreign affairs and public administration. There are some areas Wales may choose to spend more money on as well.
£13.5billion is a scary number – and the 2020-21 Covid-19 pandemic has thrown the public finances of the whole UK into doubt, let alone Wales – but until we all have a better idea as to how an independent Wales would spend its own money, it’s not entirely relevant to the debate.
Deficits are normal and the finances of countries aren’t the same as finances of households. That said, any “deficit” would have to be manageable – perhaps running no more than a ballpark figure of £3billion a year (~4-5% of GVA). The trouble with making predictions for how an independent Wales would balance the books is that there are very few accurate figures out there.
